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The Detroit Motor Show coincides with a smattering of industry conferences to make January a busy month in the automotive sector – and a good source of intelligence for credit investors. This time, the insights we gained reaffirmed our conviction in a long-held relative-value trade involving two giants from the Motor City.

The slowdown in US auto sales, heavy use of financing deals by car buyers and the leverage assumed through a recent acquisition have driven us towards a defensive position against auto-parts specialist American Axle. The US automotive sector has shifted up through the gears since the 2008 financial crisis. Seasonally adjusted annual sales (SAAR) of new cars and light trucks reached a peak of 17.6m in 2016, higher than the 16.2m recorded in 2007 and 10.4m as the crisis unfolded in 2009 . By interrogating the data, we find that light trucks – including pick-up trucks, sports utility vehicles and crossovers – have led the ongoing recovery since 2015 as passenger-car sales began to decline (see figure 1). This demand was driven by factors including evolving consumer preferences, lower oil prices and manufacturers’ aggressive use of discount incentives. Macroeconomic conditions also helped fuel the recovery, enabling automakers to offer financing to potential buyers at low interest rates and with longer terms. Immediately after the crisis, the proportion of vehicles bought through finance was in the mid-70% range but today it stands at 85% .

Concern about climate change and air pollution is driving an increasing focus by governments on the environmental impact of the automotive sector.

Business has been tough for US retailers. Industry-wide challenges have resulted in weak performance across the sector, leading to widening credit spreads. In some cases, these movements have been excessive, providing opportunities for investors to gain exposure to attractively valued companies with strong credit profiles and effective strategies for adapting to change. Challenging conditions: priced in, or leading to over selling? Despite a supportive US economy, with improving macroeconomic data and rising consumer confidence, retailers have suffered. This is primarily due to secular changes in the industry, which include: consumers’ growing preference for experiences instead of clothing, declining tourist numbers (and therefore holiday shoppers), unseasonal weather, and increasing competition from e-commerce pure players such as Amazon. This has led the performance of speciality retailers and department stores to weaken in the past few quarters. Most have reported worsening like-for-like store sales, and increasing competition has forced prices – and hence operating profit margins – down. Some have responded by closing bricks-and-mortar stores to adapt to the growth of online shopping.

Despite an improving domestic economy, the US retail industry is under pressure. Changing consumer preferences, falling tourist numbers, unseasonal weather and the rise of fashion e-retailers are among the reasons why US retailers – and department stores in particular – are struggling. We responded to this structural change with a defensive trade involving Macy’s, whose flawed strategy for reviving sales has proved one of the least effective in the sector. Last November, we assessed how these dynamics are increasingly affecting US retailers and focused on two department stores, Macy’s and JCPenney, in Spectrum, our quarterly newsletter. We concluded that despite similar elements in their respective strategies, such as a focus on private brands and exclusive products, Macy’s should ultimately underperform given specific weaknesses in its plan.